"This package of loans returns N times the risk free rate of return but is just as safe, according to ratings agencies!"
Do people really not remember 2008? Jesus. The problem of course is that a conflagration in one sector of the financial markets all too easily spreads to others (remember when it was just subprime mortgages that were in trouble? then when it was just mortgages? then when HOLY SHIT THE APOCALYPSE IS EXTREMELY NIGH, SELL EVERYTHING AND BUY SPAM/AMMO?), e.g. through highly leveraged and interwoven networks of derivatives. If (when) this goes tits up I hope there are enough risk analysts being listened to at the Too Big To Fail orgs that counter-party/swap risks are minimized to just the direct players in this market.
Sure they remember. They remember that the last time this happened, taxpayers were fleeced to prop up the organisations and individuals who should have lost everything.
Google 'moral hazard' for a more detailed explanation.
And they will do it again...one of the first things the new Congress did was repeal Dodd-Frank provisions that required banks to do some of their derivative trading in separate entities that were not FDIC insured.
Do people really not remember 2008? Jesus. The problem of course is that a conflagration in one sector of the financial markets all too easily spreads to others (remember when it was just subprime mortgages that were in trouble? then when it was just mortgages? then when HOLY SHIT THE APOCALYPSE IS EXTREMELY NIGH, SELL EVERYTHING AND BUY SPAM/AMMO?), e.g. through highly leveraged and interwoven networks of derivatives. If (when) this goes tits up I hope there are enough risk analysts being listened to at the Too Big To Fail orgs that counter-party/swap risks are minimized to just the direct players in this market.